In a new report[1], an American NGO says that International Financial Institutions should abstain from investing in Kazakhstan and Turkmenistan. Poor governance and lack of transparency are threatening the fragile Caspian Sea Ecosystem says Crude Accountability. Too radical?

"By financing the construction of roads, ports and rail systems, the IFIs [International Financial Institutions] have enabled transport of Caspian oil and gas to Europe and Asia. The unprecedented scale of oil extraction will come with very high risks of oil pollution and threats to endangered biological species", says the new Crude Accountability report, "The Great Enablers", released last December.

In its 33 page report, the US NGO recommends the World Bank, IFC, EBRD, ADB or IDB[2] abstain "from state-controlled resource-related projects due to the governance issues involved." With that position, which some experts consider too radical, the NGO raises the question of the strategy that IFIs should follow.

The sub-title of the report is "How Investments by International Financial Institutions Threaten the Fragile Caspian Sea Ecosystem." But behind the environmental concerns, the American NGO also draws attention to very poor governance and human rights violations in Turkmenistan and, to a lesser extent, in Kazakhstan.

The two issues are closely connected: "Public hearings for the Turkmenbashi Port, Atash marine base and Sartas Port demonstrate how public consultations serve only to justify already planned projects." Indeed, how to conduct a public consultation in such a dictatorship as Turkmenistan? For example, how worthwhile are environmental and social impact assessments for the Turkmenbashi Shipyard, for which EBRD allocated Û180,000 in 2011?

The great value of the report lies in its questioning of "investments made by IFIs (...) in the Caspian region." Isn't it public money? But it is also about how to engage such countries as Turkmenistan. By asking the question, Crude Accountability has conducted a comprehensive assessment of IFI projects in the region, especially in Turkmenistan. "Although IFIs were initially hesitant to invest in the Turkmen oil and gas industry, more recently the IFIs considered investments in transport and the hydrocarbon related projects", says the report.

In this difficult political context, The World Bank has made few investments but it is considering financing the Turkmenbashi Port, to facilitate trade between Europe and Asia. EBRD worked on projects such as the construction of a shipyard and a ship repair facility at the Turkmenbashi port. In 1997 it provided a Û30 million loan to improve the port's terminals, and financed in 1999 part of the structural works on off-shore platforms developed by Dragon Oil Ltd. ADB signed in 2011 a $125 million agreement with Ashgabat for the financing of part of the North-South railway, connecting Kazakhstan with Iran, to facilitate the shipment of oil products, among others. ADB is also promoting the TAPI pipeline project, which is designed to export Turkmen gas to India, via Afghanistan and Pakistan. As for IDB, it has invested $371 million for the construction of the final section of the railway from Bereket in eastern Turkmenistan to the Iranian city of Gorgan.

"The Great Enablers" asks why IFIs choose to finance hydrocarbon-related projects: "This report demonstrates how IFIs have made separate but complementary investments in the Caspian Sea basin that attempt to overcome the transportation hurdles in the hydrocarbon supply chain to the west."(it is said page 5). This is why ultimately IFIs don't pay enough attention to the environmental or social impact of the projects.

Emma Wilson, from the International Institute for Environment and Development (IIED) says that may be partly true:

"IFIs may also seek to support energy security at a global level, without promoting the interests of particular countries or regions", she says.

"Some projects, as the railroads for example, are designed to carry not only oil products. They will also transport other goods and serve customers and, thus, have a wider economic and social impact. Oil can be a driver for the whole economy", adds Tina Flegel, who is working on a dissertation at the Freie UniversitŠt Berlin on "Effective Policy-making under Conditions of Complex Uncertainty", focusing on energy issues in Azerbaijan.

As for the environment, Richard Pomfret, a specialist of Central Asian economy, disagrees with the thrust of the report:

"The question is whether the trade-off between generating economic activity and incomes is worth the environmental deterioration. The NGO takes a rather extreme position – essentially saying that nothing could justify the damage, so IFIs should not be promoting resource-led development. I would argue that it depends on the government with whom the IFIs are working", said Mr Pomfret by email.

Indeed, states Tina Flegel, "there are no energy projects without environmental impact. Any decision needs to weigh the project's advantages and disadvantages – the critical question is how positive and negative effects are distributed. We can expect that projects with IFI-involvement are safer, because the IFIs international standards are higher than the national ones."

"If Turkmenistan and Kazakhstan could easily cover the investments themselves, they would not seek IFI involvement and everything that comes with it. And if the investments were realized through private companies or say, Chinese state-companies only, would this be better for sustainable development? At least IFI involvement provides some grounds for public scrutiny and involvement", answers Tina Flegel.

Emma Wilson has a similar perspective: "Governments of the Caspian Region care a lot about their image abroad, especially in the West. Financing projects is a way for IFIs to keep the doors open."